Thanks to a raft of legislation over the past year -- the Recovery Act, the Small Business Jobs Act, the HIRE Act, the Affordable Care Act and the Tax Relief and Job Creation Act -- there have been many changes to the tax laws. With tax time coming up fast, make sure you are familiar with the changes that might affect your business.
Here’s an overview:
Elimination of capital gains taxes: To provide incentives to invest in small businesses, capital gains taxes have been fully eliminated on certain small business stock.
Section 179 expensing extension: This enables businesses to speed deductions by writing off the full amount of the purchase of qualifying equipment or computer software bought in 2010 or 2011. Up to $500,000 per year can be written off, and both new and used items qualify. However, in order to use the write-off, you must show a profit in the year in which you’re taking the deduction.
Bonus depreciation extension: To further help small businesses hold onto cash so 2010 businesses can accelerate depreciation. This applies even to businesses that showed a loss in 2010. Bonus depreciation applies to new equipment only, and covers both tangible and intangible property (the latter including patents and other types of intellectual property). If an item is eligible for both Section 179 and bonus depreciation, you can take both deductions.
You can claim 100 percent of the cost of qualifying items bought between Sep. 8, 2010, and Dec. 31, 2010; and 50 percent of the cost of items purchased before Sep. 8. The 50 percent bonus depreciation will be extended through the tax year 2012.
Business vehicle depreciation: If you bought a new business vehicle in 2010, you may qualify for an extra $8,000 bonus depreciation. That can mean total depreciation of up to $11,060 for a car and $11,160 for a light-duty truck or van.
Tax relief/simplification for cell phone deductions: This small change could relieve some big headaches if you have a lot of employees who use cell phones for business, such as a sales force. The Small Business Jobs Act simplified rules related to business cell phone deductions so that as of 2010, cell phones can be expensed and deducted like other business property, without additional, onerous requirements.
Increased startup costs deduction: For 2010, the Small Business Jobs Act temporarily doubled to $10,000 -- the deduction new business owners can claim for business startup expenses.
5-Year carryback of general business credits: A business’s unused general business credit can usually be carried back to offset taxes paid the previous year. The remaining amount can be carried forward 20 years to offset future taxes. The Small Business Jobs Act extended the “carryback” period from one year to five years for certain small businesses in 2010, so businesses apply their 2010 credits to previous tax payments going back to 2005.
Limitations on penalties for errors in tax reporting: Strict penalties apply when taxpayers fail to disclose certain “reportable transactions.” For many small businesses, the penalties are disproportionately high. The Small Business Jobs Act adjusted the rules to achieve proportionality between the penalty and the tax savings starting with tax year 2010.
General business credit not subject to alternative minimum tax (AMT): The Small Business Jobs Act allows certain small businesses with $50 million or less in average annual gross receipts for the previous three years to use all types of general business credits against their AMT liability, not only their regular tax liabilities, starting in tax year 2010.
Health care tax credits/deductions: Certain small businesses that pay at least half of health insurance premiums for employees get tax credits of up to 35 percent of the cost of employee premiums for tax years 2010 through 2013. In 2014, the maximum credit increases to up to 50 percent. Businesses with 10 or fewer full-time employees and annual wages averaging $25,000 or less get the maximum credit; for firms with 25 employees or that pay average wages above $50,000, the credit is phased out.
Health insurance deduction for self-employed: The Small Business Jobs Act allows self-employed individuals to deduct 100 percent of health-insurance costs incurred in 2010 for themselves and their families.
Tax credit for hiring unemployed workers: In 2010, the HIRE Act provided a payroll tax credit for hiring employees who have been out of work for 60 or more days, as well as a credit of up to $1,000 for retaining them.
That’s a whole lot of credits and deductions. Not all of them will apply to every business, of course, but taking advantage of those that do can help you keep more of your hard-earned profits in the business. Talk to your tax professional and visit the IRS’ Small Business and Self Employed Tax Center, which has information and resources to help.